Depreciation is a tax advantage that should be carefully managed, points out Brad Palen, a Certified Public Accountant. This tax season, farmers have an excellent shot at larger depreciation deductions due to a temporary bonus depreciation rule in effect for 2008.
"The economic stimulus package that was passed in early 2008 included a provision for bonus depreciation,” says Palen, who is a manager in the ag division at Kennedy and Coe, a Midwestern accounting firm. "The bonus depreciation only applies to new equipment purchases, where you can write off 50% of the qualified asset's cost in the first year.”
Palen says that by using the enhanced Section 179 election, which was raised to allow deductions on up to $250,000 worth of equipment purchases in 2008 (up from $128,000 in 2007), plus bonus depreciation, farmers may be able to write off a large portion of their equipment purchases in the first year. However, he cautions that depreciation should fit into your overall tax plan.
"People can get caught up in buying new equipment to save tax dollars and write it all off in the first year, which may make sense short-term, but they need to keep the longer-term strategy in focus as well,” says Palen. "If they elect to write it all off in 2008, they won't have the benefit of depreciation deductions on those assets in the future. Be sure you don't kill the goose to get the golden egg.”
Dennis Rollenhagen, who farms near Wells, Minn., says that he tends to make the major decisions about how much depreciation to take for his equipment purchases at the end of the year once he has looked at his overall tax burden. "Once harvest is over with, then we look at if we should delay income or make purchases and then we make the final decisions,” says Rollenhagen. He adds that blips in the tax code might influence decisions but they don't radically change his usual equipment replacement strategy. The year 2008 definitely is a blip, notes Palen, since bonus depreciation will no longer apply and the 179 election goes back down to approximately $130,000 in 2009.
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